2007 jetro whitepaper on international trade and foreign direct investment

2007 JETRO WHITE PAPER
ON
“INTERNATIONAL TRADE AND
FOREIGN DIRECT INVESTMENT”
Increasing Utilization of Asian FTAs and Growth Strategies for Japanese Companies
Japan External Trade Organization（JETRO）

1
Preface
In 2006, the world economy recorded its third successive year of high economic
growth, at around 5%. China and India, in particular, maintained their high levels of
growth, and their rate of contribution to the world economy was approximately 40%.
The favorable world economic situation stimulated increased trade and investment. The
growth in trade was propelled by skyrocketing prices for primary products such as crude
oil and metal, while increased activity in the area of cross-border M&As against a
background of increased corporate profits and low interest rates was a factor stimulating
growth in investment.
In recent years, the expansion of the middle income bracket and increased
consumption in emerging economies such as the BRICs has seen the development of a
middle income market in these countries. In the U.S. and other countries, the trend
towards reduction in the prices of consumer goods such as digital home electronics is
accelerating. The U.S. is seeing the development of business models responding to this
reduction in prices, using overseas outsourcing for the production of semiconductors
and other goods in addition to home electronics. In the field of automotive
manufacturing as well, modularization is reducing costs in Europe and the U.S. This
White Paper attempts to seek new business models for Japan in response to these trends
in the emerging economies, Europe and the U.S. Viable options include the strategic use
of overseas outsourcing, the formation of alliances with businesses in the emerging
economies and the recruitment of local employees. It will also be important to be
proactive in conducting PR programs overseas regarding the value of integrated type
products.
At the same time, the stimulation of trade by means of FTAs and EPAs in the
Asia-Pacific region will be essential for the smooth overseas expansion of businesses
targeting the middle income market. The rate of utilization of FTA schemes in the
Asia-Pacific region is increasing annually. Test calculations for Asia-Pacific FTAs,
including an ASEAN+6 FTA, indicate that the greatest benefits will result from FTAs
and EPAs that eliminate tariffs and reduce non-tariff measures (NTMs). The creation of
mechanisms to enable the reduction of overall service link costs (the cost of connecting
different bases, including tariffs, NTMs and transportation costs) will therefore be
essential to pushing ahead with FTAs and EPAs.
Part 1 of this White Paper provides a general overview. Chapter I considers the status
of the global economy, trade and direct investment and the direction of the new round of
WTO negotiations, while Chapter II discusses Asian FTAs that have started in full scale
and Japan’s strategies for growth. Chapter III examines the development of global

2
business models by Japanese companies and associated issues, and supplements this
discussion with consideration of trends in the middle income bracket of the emerging
economies such as BRICs and marketing strategies targeting this stratum.
Trade and direct investment statistics for Japan and the world are continuously updated
on the JETRO Website (www.jetro.go.jp), and may be consulted in association with this
text. (Details can be found on the last page of this White Paper).

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Contents
I Status of the World Economy, Trade and Direct Investment 8
1. The World Economy: Status and Issues ···································································································· 8
(1) The world economy records its highest growth since the 1980 in 2006
(2) The housing sector and crude oil prices are risk factors in the U.S. economy
(3) 2006 high growth levels expected to continue in Europe
(4) Developing economies: Continuing high growth and risk factors
(5) Increasing activity in cross-border capital transactions and risk factors
2. World Trade ··············································································································································· 25
(1) World trade increased by 15.4% in 2006, the fourth consecutive year of double-digit growth
(2) China’s trade structure changing, Imports of intermediate goods slowing
(3) World service trade increases by 10.6% in 2006
3. Global Direct Investment and Cross-border M&As··············································································· 39
(1) Global inward direct investment exceeds 1 trillion dollars for the second consecutive year in
2006
(2) 2006 level of cross-border M&As is second only to 2000; LBOs increase
4. Trade and Direct Investment in Japan ····································································································· 55
(1) The Japanese economy: Towards a stable growth trajectory
(2) Trade in Japan
(3) Outward direct investment in Japan
(4) New records set for inward direct investment inflows and outflows
Column I-1 Japanese companies using Asia as a base to increase overseas profitability
5. WTO ···························································································································································· 90
(1) Trend of the new round: Difficulty in building consensus
(2) Correction of unfair trade practices via WTO dispute resolution procedures
II Searching for the Growth Strategy for Japan in the Growing Momentum in
Asian FTAs 106
1. The World and the Asian FTA ················································································································ 106

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(1) Rise in FTAs Worldwide Accelerated by Lagging WTO New Rounds
(2) Trends in the Asian FTA Getting More Attention from the World
(3) Japan's EPA Strategy
(4) NAFTA as a Precursor of the FTA Between Advanced and Developing Countries
(5) EU Still Continuing to Implement Measures for Integration
Column II-1 Adoption of SOLVIT Makes Dispute Resolution Easy to Turn to
2. Economic Effects of FTAs ······················································································································· 123
(1) FTA Model Analysis with a Focus on ASEAN
(2) The Importance of Reducing Service Link Costs
(3) ASEAN+6 Significantly Expands Imports and Exports in the Area
Commentary Overview of Simulation, Assumptions and Preconditions, Etc.
3. Increasingly Tight Economic Ties in Asia and the Utilization of Asian FTAs with Issues
Involved ····················································································································································· 133
(1) Increasingly Tight Economic Ties in Asia
Column II-2 Asian Economic Development of Tighter Ties as Seen in Terms of
International Input-Output Tables
(2) Utilization of FTAs Advancing Step-by-Step in Asia
Column II-3 Japan-Mexico EPA Shows Effects in Japan's Automobile and Other
Exports to Mexico
(3) FTAs in Asia Face Issues Affecting Utilization, Including Rules of Origin
Column II-4 EU Adoption of Cumulative Rules of Origin
4. Building Asia-Pacific Economic Partnerships ······················································································· 162
III Global Business Models and Concerns for Japanese Companies 166
1. Enhancing company capacity to build international business models ··············································· 166
Column III-1 The Product Architecture Theory: integral type or modular type?
2. The global competitiveness of Japanese industry·················································································· 176
(1) Digital home electronics
Column III-2 Different price ranges in Japan and the U.S.
(2) Semiconductors
Column III-3 Japan’s metal processing technology: supporting world innovation

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(3) Automobiles and parts
(4) Finance
3. Issues with the service industries’ activities in emerging markets ······················································ 194
4. Current status and issues with Japanese companies’ overseas intellectual property
strategy ······················································································································································· 199
Column III-4 Cooperation and request are the key to Public-private Intellectual
Property Protection Missions, Japanese companies’ trump card for
protecting intellectual property in China
Supplement: Japanese Companies’ Growth Strategy and Emerging Markets······································· 206
Column III-5 The middle class: driver of automobile sales (Russia)
Foreign brand autos in high demand
GM sets aside special sales area for wealthy customers
IV
The Growing Use of Free Trade Agreements in Asia and Japanese Company
Growth Strategies (Conclusion) 225
Appendix 230

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Explanatory Notes
1. Abbreviations of publications and publishing organizations
(1) IFS: International Financial Statistics (IMF)
(2) DOTS: Direction of Trade Statistics (IMF)
(3) WEO (D): World Economic Outlook (Database) (IMF)
2. Figures
As follows, unless otherwise indicated.
(1)In text, figures and tables, “year” indicates the period January-December, and “fiscal year”
indicates the period April-March.
(2)In tables, figures for “foreign currency reserves” and “outstanding outward debt” are year-end
figures.
(3)Figures for “rate of growth” are year-on-year figures.
(4)In figures and tables, “-“ indicates lack of results, “0” indicates figures of less than a unit, and
“n.a.” indicates that figures are unclear or unavailable.
(5)Because figures are rounded, there may be discrepancies in total.
3. Country and region classifications
As follows, unless otherwise indicated.
(1)ASEAN (Association of Southeast Asian Nations): Indonesia, Singapore, Thailand, Philippines,
Malaysia, Brunei, Vietnam, Laos, Myanmar, Cambodia
(2)ASAN 4: Indonesia, Thailand, Philippines, Malaysia
(3)Asian NIES: South Korea, Taiwan, Hong Kong, Singapore
(4)Hong Kong and Taiwan are treated as independent economies
(5)The accession of Romania and Bulgaria in early 2007 brought the number of EU countries to 27;
however, this White Paper mainly considers 2006 trends, and “EU” therefore as a rule refers to the
EU25.
EU25: The EU15, plus 10 new member countries
EU15: Austria, Belgium, Denmark, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg,
Portugal, Spain, Sweden, Netherlands, Britain
10 new EU member countries: 10 countries which acceded in May 2004 (Cyprus, Czechoslovakia,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia)
(6) NAFTA (North American Free Trade Agreement): U.S., Canada, Mexico
(7) BRICs: Brazil, Russia, India, China
4. Base point in time

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As a rule, the base point in time is at the end of July 2007 for the General Overview, and the end of
June 2007 for the studies by country and region.
5. Trade statistics
World trade figures in the General Overview are as a rule based on the World Trade Atlas, while
figures in the studies by country and region are in general based on locally published trade statistics.
Variations in the methods used by some countries and regions to convert figures to dollars, etc., may
result in discrepancies between figures in the General Overview and figures in the studies by country
and region.

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I. Status of the World Economy, Trade and Direct Investment
1. The World Economy: Status and Issues
(1) The world economy records its highest growth since the 1980 in 2006
In 2006, the world recorded a real GDP growth rate of 5.4% (IMF, purchasing power parity [PPP]
basis1
), the highest figure recorded in the period for which statistics are available, from the 1980
onwards. The world economy has maintained high growth at a rate of around 5% for three
consecutive years since 2004. This rate significantly exceeds the long-term (1980-2006) average rate
of 3.5%.
World trade and direct investment also recorded year-on-year increases in 2006, with trade
increasing by 15.4% on a nominal export basis and direct investment increasing by 25.8% on an
inward direct investment basis. This made 2006 the third successive year of high growth in the world
economy, trade and direct investment (Fig. I-1).
The developing countries provided the engine for these historic levels of growth. (Developing
countries and their economies will be discussed later.)The growth rate of the developing countries
was 7.9% in 2006, representing a pace of development more than twice that of the developed
countries, which recorded a figure of 3.1% (Table I-1). With a rate of contribution of 65-70% to
economic growth between 2004 and 2006, the developing countries have provided an overwhelming
level of propulsion to the world economy.2
Among the developing countries, the contribution of
China and India (each of which recorded growth of around 10%) was 29.4% and 10.3% respectively,
meaning that the collective contribution of these two Asian giants to the world economy was
approximately 40%.
1. Purchasing power parity (PPP) is calculated on the basis of how much goods and services actually
sell for in different countries (domestic-foreign price difference). This indicator is considered to be
more accurate than the nominal exchange rate, which varies significantly in response to a variety of
factors. World GDP growth rates published in the IMF’s World Economic Outlook (WEO) are
calculated on a PPP basis.
2. The high rate of contribution of the developing countries is due to the fact that the GDP of these
countries, in which commodity prices are low, appears higher on a PPP basis than the actual rate. On
a PPP basis, the GDP of the developing countries represents 48.0% of the world total, while in terms
of the actual GDP rate it represents 25.6% of the total, an almost two-fold difference.
The developed countries displayed a more balanced economic growth than the U.S.-led growth

9
observed to date. The developed countries collectively represent the main area of final demand in the
world economy, and there is a risk that an excessive dependence on the U.S. could have a major
impact in the event of a slowdown in the U.S. economy. However, in 2006, the EU25 economy
recorded growth of 3.0%, overtaking the U.S. at 2.9%. The rate of contribution of the EU to the
world economy was 11.7%, surpassing that of the U.S. (10.8%) for the first time since the recession
that followed the collapse of the IT boom in 2001.
The world economy has recently experienced a set of conditions favorable to high economic
growth: 1) Rapid economic growth, stimulated by exports and investment, in developing countries
integrated into the international division of labor (China is a representative example); 2) Favorable
financial conditions; and 3) Control of inflation. On the finance front, Japan, the U.S. and the EU
have actively adopted monetary loosening policies since 2001 to dispel concerns over deflation,
resulting in the supply of excess liquidity and the invigoration of financial markets. Following this,
the U.S. increased interest rates 17 times from June 2004 to normalize rates. Despite this, as of 2006,
interest rates in Europe and the U.S. were sitting at 4-5%, and stock prices around the world had
reached their maximum ranges. In addition, the risk spread (the difference in yield with U.S.
Treasury bonds) of high-risk bonds and bonds issued by developing countries was maintained at a
low level. In mid-2006, global financial markets underwent a process of short-term adjustment. This
shifted them to a growth footing, providing a boost to the world economy. Fears of inflation caused
by skyrocketing crude oil prices were calmed by a reduction in prices in the latter half of 2006. The
world inflation rate of 3.8% for 2006 is no higher than the average figure since 2000, and the figure
of 2.3% for the developed countries was within the acceptable range. At 5.3%, the inflation rate for
the developing countries was lower than the 6.0% average since 2000, and represents a relatively
low level in comparison to past figures (Fig. I-2).
Despite a slight reduction in the pace of growth compared to 2006, the world economy is expected
to maintain a high level in 2007. The IMF predicts a growth rate of 5.2% in the world economy in
2007 (as of July 2007). Looking at risk factors, in addition to the potential overheating of the Indian
and Chinese economies and spiraling stock prices, there are concerns over the effect of the U.S.
sub-prime loan problem and the failure of hedge funds on financial markets.
(2) The housing sector and crude oil prices are risk factors in the U.S. economy
The U.S. recorded a real GDP growth rate of 2.9% in 2006, the third consecutive year of growth at
around the 3% mark since 2004. However, a downturn in facility investments, combined with
reduced housing investment from the second half of 2006 through 2007, resulted in a slowdown of
the economy. The growth rate in the first quarter of 2007 slipped below 1%, recording 0.7% on a
quarter-by-quarter basis.
Housing investment displayed two-figure negative growth from the 2nd through the 4th quarters

10
of 2006. The contribution rate also shows housing investment figures to have reduced GDP growth
by around one point per quarter on average. Adjustment of the housing sector is dragging on, and
concern remains over the effect of the sub-prime loan problem on financial markets. This sector has
therefore been indicated as a risk factor for GDP. However, considering the status of the U.S.
economy as a whole, as of the present, adjustment of housing prices has been limited, and no major
drop in prices has occurred; personal consumption is also growing steadily. These factors reduce the
probability of the scenario of a downturn in the U.S. economy due to reduced housing investment.
While the situation in the housing sector has obscured its significance, the downturn in U.S.
facility investments is continuing. Facility investments had recorded growth of around 6% on
average in recent years, but growth became negative in the 4th quarter of 2006. However, this result
is considered to have been strongly affected by cyclical factors arising from inventory adjustment,
and there are strong expectations of a progressive recovery.
Taking the factors discussed above into consideration, there are many reasons for optimism
regarding future trends in the U.S. economy. Economic forecasts by private sector organizations in
the main predict a return to potential growth rates (in general, around 3%) in 2008.
Trends in crude oil prices can be indicated as a risk factor in sectors other than the housing sector.
In summer 2006, crude oil prices exceeded $70 per barrel, and gasoline also cost approximately $3
per gallon. This had a considerable effect on sales of large pickup trucks, etc. (Fig. I-3; monthly
data). Following this, over January 2007, crude oil prices dropped to $54-55 per barrel, and gasoline
prices fell to around $2.20-2.30 per gallon. However, the climb in prices then picked up pace, with
gasoline prices rising to a new record of over $3 per gallon in May. A review of trends over a period
of around two years shows that crude oil and gasoline prices have continued a steady rise while
increasing and decreasing within a specific range.
The weakening of the housing market would not by itself result in a reduction in consumption and
a consequent downturn in the U.S. economy, but it is having a significant impact in combination
with the rise in crude oil prices. During the downturn of 1990-1991, an increase in crude oil prices
(prices doubled from $18 per barrel in July 1990 to $36 per barrel in October 1990) coincided with a
reduction in housing investment (quarter-on-quarter negative growth of 15-20% for four consecutive
quarters), resulting in negative growth in individual spending. If geopolitical factors were to overlap
with a repeat of the destructive hurricanes that lashed the U.S. in 2005, generating a further rise in
crude oil prices, the potential for an economic downturn would increase.
With regard to inflationary fears, while the prices of natural resources such as crude oil continue
to increase, the pace of employment increases is gradually slowing and the Federal Reserve Board
(FRB) is implementing prudent financial management policies. The risk of inflation is therefore
limited. Long-term interest rates began to increase in May and June 2007, and this is suppressing a
recovery in housing investment. However, long-term interest rates are unlikely to continue to

11
increase when inflationary fears have been eliminated.
Turning to the twin deficit, the fiscal deficit (in relation to GDP) reached its peak at 3.6% in 2004,
and dropped to 1.9% in 2006. Against a background of continuing outflow, in particular to fund the
engagement in Iraq, increased tax revenues generated by the economic upturn contributed to the
reduction of the deficit. The current account deficit (in relation to GDP) has continued to worsen on
a yearly basis, and 2006 was no exception. Despite this, if the figures are considered on a quarterly
basis, the deficit declined from 6.5% in the third quarter of 2006 to 5.6% in the fourth quarter. This
is an effect of the slowing of the growth of the trade deficit, which had previously been driven by a
decline in domestic demand, a weak dollar, and high crude oil prices, among other factors. However,
the current account deficit remains high, and the danger of a “triple sell-off,” a mass dumping of U.S.
dollars, U.S. Treasury bonds and U.S. stocks has by no means been eliminated. The current account
deficit is the reverse side of excess expenditure (or a too-low level of savings), the inherent structural
problem of the U.S. macro-economy. Economic management to regulate domestic demand, personal
consumption in particular, will be required for a certain period in order to control the current account
deficit to a sustainable level.
Economic management to regulate domestic demand, in particular personal consumption, will be
required for a certain period in order to control the current account deficit to a sustainable level.
(3) 2006 high growth levels expected to continue in Europe
The European economy commenced a process of recovery from the second half of 2003, but the
economy slowed from the second half of 2004 through the first half of 2005. Following this, the EU
economy regained a recovery pace, and the EU25 recorded a real GDP growth rate of 3.0% in 2006
(2.7% in the Euro zone) (Table I-2). This rate of growth was more than 1% higher than the 2005 rate
(1.8%; 1.5% in the Euro zone), and exceeded initial projections. The rate of growth of the European
economy has been low for the past several years, not exceeding the 1-2% level, and the 2006 figures
represent the highest level of growth since the figure of 3.9% recorded in 2000.
This rapid recovery is being driven by domestic demand centering on investment in facilities;
gross fixed capital formation recorded a year-on-year increase of 5.5% in 2006. The economic
upturn is supported by rising private sector expenditure, which recorded an increase of 2.0% as
consumer confidence recovered on the back of improving employment figures. In addition, exports
displayed a high level of growth, recording an increase of 9.2% against the background of steady
growth in the world economy due to increasing demand in emerging markets. (The rate of
contribution of net exports was 0.1%).
Considered by country, the German economy displayed the greatest recovery. The German
economy had stagnated since 2001, maintaining growth of only 0-1%, but it broke the 2% barrier for
the first time in two years in 2006, recording a figure of 2.8%. The Italian economy had similarly

12
been in a state of stagnation, but displayed signs of a recovery in 2006, recording growth of 1.9%.
The French and Spanish economies have been supporting the economy of the Euro zone for the past
several years. In 2006, Spain maintained its drive with a growth rate of 3.9%, while growth in
France was low-key at 2.0%. Growth rates were higher outside the Euro zone. The new Central and
Eastern European member countries in particular displayed high growth of approximately 4-8%,
with especially high growth exceeding 10% in some Baltic states.
German companies have regained international competitiveness by controlling wages and labor
costs, and have improved their business results. A rapid growth in exports, in particular to emerging
markets, and increasing investment in facilities are factors in the country’s achievement of a high
rate of growth for the first time in six years. The fact that investment in construction shifted to
positive growth in 2006 after recording year-on-year negative growth every year from 1995, with the
exception of 1999, was also an important factor. Personal consumption also increased on the back of
improvement in the employment situation. A percentage of the expansion in consumption resulted
from temporary factors, such as demand in advance of a 2007 increase in value added tax from 16%
to 19%, and demand for AV equipment related to the holding of the soccer World Cup.
￭ The level of growth recorded in 2006 is predicted to continue in 2007
The EU predicts that growth in the EU25 will maintain a rate very close to the 2006 rate of 2.8%
(2.6% for the Euro zone) in 2007.
Increases in domestic and foreign demand are projected to continue, increasing the utilization rate
of facilities and improving business results. Given the consequent rise in the ability and the desire of
companies to conduct investments, the current increase in facility investment is predicted to continue.
The outlook is for a continuing decline in the unemployment rate, improvement in the employment
situation, and growth in real wages, enabling the projection of a continued stable increase in personal
consumption.
In the first quarter of 2007, the EU25 maintained the strong growth characterizing 2006, recording
year-on-year growth of 3.1% (3.0% for the Euro zone). While figures for personal consumption
displayed a slight drop in Germany (down 0.2%), figures for investment in facilities showed a
considerable increase to 8.6%, enabling the achievement of a growth rate of 3.3%. It is predicted that
the increase in value added tax will not have a significant effect.
A downturn in outward demand in the event of a greater than expected slowdown in the pace of
growth in the U.S. economy is a risk factor, as is the effect of an increasingly strong Euro on exports.
An exchange rate of 1 euro to 1.33 U.S. dollars or 158.9 Japanese yen is a base condition of EU
economic forecasts, but the euro climbed past this rate from April.
A slowdown in housing investment, which had previously been supported by booms in Spain and
the UK, and the effect of increases in interest rates are risk factors in terms of domestic demand.

13
Interest rates increased eight times in the Euro zone between December 2005 and June 2007, and
five times in the UK between August 2006 to July 2007, resulting in an increase in the policy rate
from 2.0% to 4.0% in the former, and from 4.5% to 5.75% in the latter. There are concerns that a
further increase in interest rates in 2007 could have an impact on consumption and corporate
investment.
(4) Developing economies: Continuing high growth and risk factors
In 2006, the developing economies recorded real GDP growth of 7.9%, their highest level of
growth since 1980. The real GDP growth rate of the developing economies was 7.7% in 2004 and
7.5% in 2005, making 2006 the third consecutive year of growth at 7.5% or above (Fig. I-4). Due to
the scale of the economies of China and India (China represents 31.4% and India 13.1% of the total
GDP of the developing countries) and their extremely high growth rates of around 10%, the rate of
contribution of these economies to economic growth in the developing economies overall was
correspondingly high, with a figure of 42.9% for China and 15.1% for India. Taken together, this is
just under 60%. As is clear, a significant proportion of the results for the developing economies is
dependent on the performance of China and India, and the medium- to long-term prospects for
economic growth in the two countries and potential risk factors affecting this growth are therefore a
focus of concern.
￭ Continuing high economic growth in China and concerns regarding investment overheating
The Chinese economy has maintained long-term high levels of growth. Since 2000, the lowest
level of growth recorded by the country was 8.3% in 2001, while a level of more than 10% has been
maintained since 2003. China’s total import and export volume increased by 350% between 2001
and 2006, reaching $1,760.7 billion in 2006, putting the country in third place behind the U.S. and
Germany. Since China’s accession to the WTO, the country has attracted interest as a market in
addition to a production base, and the pace of direct investment is accelerating.
Because China’s high rate of growth in the past several years has been dependent on increases in
fixed capital investment and exports, some doubt exists with regard to its sustainability. The country
is in a situation in which an inflow of hot money may be generated by expectations of an increase in
the value of the yuan based on the trade surplus and investment inflows. The yuan has actually been
increasing in value at a relaxed pace since the country revised its exchange rate regime in July 2005.
Because the level of sterilization (the absorption of base money by the central bank via the sale of
government bonds, etc.) is insufficient in relation to massive influxes of foreign funds, there is an
undeniable potential for excess liquidity to result in real estate speculation and overheating of
investment in booming industries.
China’s development has resulted in inward contradictions, such as the economic gap between

14
regions. The country has shifted its course from “Senpuron” (prioritized development of certain
regions and industries) to “Wakai shakai” (the achievement of a harmonious society), and has made
clear its intention to achieve balanced, high-quality growth in its 11th Five-Year Plan. The country
intends to move away from a growth-orientated approach excessively reliant on the infusion of
production factors and to correct the economic disparities between regions, add value to its
industries, develop its own technologies and deal with its environmental issues.
China’s consumption of crude oil, steel and other energy and mineral resources has rapidly
increased. While economic growth is driving this increased demand for resources, it is also a result
of excessive use of resources due to inefficient production methods. Increased demand from China
has also had an effect in buoying world commodity markets in recent years.
China’s government recognizes the country’s present mode of growth as being insufficiently
guided, and sees a need for change. A stable 7-8% growth rate is desirable for China, rather than a
two-figure rate that carries with it the possibility of a sudden slowdown. A rate of 7.5% is projected
in the country’s 11th Five-year Plan. In order to ensure stable growth, the country is aiming to shift
from investment-driven growth (Fig. I-5) to consumption-driven growth by means of bolstering the
farming economy, among other strategies. An increase in the minimum wage also forms part of the
background to the increase in labor costs in the country’s coastal areas. Progress in the protection of
employees is also expected, as indicated by the enforcement from 2008 of a labor contract law that
places restrictions on termination of employment. A movement towards greater selectivity with
regard to foreign capital can also be observed; at the National Peoples’ Congress held in March 2007,
it was decided that preferential measures for corporate tax on foreign-funded companies would be
progressively phased out, while the tax return rate for value-added taxes on increases in exports of
some IT and high-tech products were increased from September 2006 as a preferential measure.
Turning to responses to economic overheating, interest rates and the deposit reserve rate have
been increased in stages since 2006. However, these restraining measures have failed to allay fears
of an overheated economy, with the real GDP growth rate climbing to 11.9% in the second quarter of
2007, higher than the figure of 11.1% recorded in 2006.
China’s government is making efforts to increase the quality of the country’s growth by
continuing to apply macroeconomic control, attempting to increase consumer demand by increasing
agricultural wages, and working to improve the economy’s structural problems by reforming
national companies, the financial system and the social insurance system.
According to UN estimates, China’s population will continue to increase, reaching 1.45842 billion
by 2030. However, it is predicted that the productive population (from 15-60) will reach its peak
figure (0.92175 billion) rather sooner, in 2010. From the macroeconomic perspective, an increase in
the non-working population will cause a drain on savings. Considering the balance between savings
and investments, it can be assumed that this will be another factor generating a reduction in the scale

15
of investment.
￭ The Indian economy: Average growth of 8.6% since 2003
The pace of growth of India’s economy is accelerating, up to 9.4% in FY2006 (April 2006-March
2007) from 7.5% in FY2004 and 9.0% in FY2005 (Fig. I-6). Between FY2003 and FY2006 the
average rate of real GDP growth in India was 8.6%, considerably higher than the average figure of
5.9% recorded in the period between FY1991, when the country embarked on its program of
economic reform, and FY2002. Given the scale of India’s population (1.1 billion) and recent high
rates of growth, the Indian economy is becoming an increasingly significant presence in the world
economy.
Looking at GDP growth by industry category, a noteworthy feature of results for 2006 is that
year-on-year growth in the manufacturing sector (12.3%) outpaced growth in the service sector
(11.0%). However, growth in the agricultural, forestry and fisheries sector, which represents
approximately 20% of GDP, was low at 2.7%. The rate of contribution of service and manufacturing
industries to the real GDP growth rate was 90%. To date, agricultural, forestry and fisheries
industries have represented a high proportion of India’s GDP, a weakness in a country in which
irrigation systems are not widely diffused, and in which the effect of weather conditions on
agricultural production can have a significant effect on the entire economy. Economic stability has
increased in the past several years, with the country experiencing economic growth driven by the
service and manufacturing sectors.
However, caution needs to be exercised with respect to the potential for India’s economy to
overheat. The wholesale price index shows a declining tendency in the growth of fuel prices, while
the rate of growth of the prices of products of other primary and manufacturing industries is
increasing. The consumer price index also recorded a 6.8% increase in FY2006, against 4.2% in
FY2005. Money supply (M3) shifted to a high level, increasing 20.8% as of March 2006, and the
central bank has begun to apply a clear fiscal tightening policy, for example by raising the cash
reserve rate.
(5) Increasing activity in cross-border capital transactions and risk factors
Cross-border capital transactions continued to increase, totaling $6,482.3 billion and 14.5% of
world GDP (2005, Fig. I-7). Following the collapse of the boom in mergers and acquisitions (M&A)
in 2000, cross-border capital transactions declined sharply through 2002, dropping to 7.1%, around
half their 2000 level as a percentage of GDP. However, there was a rapid pickup from 2003-2005,
and during this period cross-border capital transactions more than doubled as a percentage of GDP.
From a medium-term perspective, the percentage of GDP represented by cross-border capital
transactions has displayed an increasing trend since 1995, pointing to the progress of financial

16
globalization. Data for 2006 is not yet available, but an increase in the level of transactions as
compared with those in 2005 is predicted.
Considering results by category, investment in securities represented 50.5%, bank loans, etc.,
represented 34.0%, and direct investment represented 15.5% of cross-border capital transactions
(2005). These recent results for capital transactions have been driven up by bank loans, etc., and
investment in securities, which increased 4.4-fold and 3-fold respectively in 2005 against 2002
figures. Among investment in securities, a higher level of investment in bonds was observed, while
results for bank loans were increased by a higher level of loans by European banks and increased
provision of funding to developing countries.
￭ Increased presence of developing countries in cross-border capital transactions
An increase in the provision of funding by developing countries is an element of cross-border
capital transactions which is attracting attention. In 2006, Asia (excluding Japan) recorded a current
account surplus of $340 billion and the Middle East recorded a surplus of $210 billion. Centering on
these two regions, developing countries are recirculating funds into global financial markets via the
management of foreign currency reserves and other mechanisms (Fig. I-8). Research shows that
funds from the management of foreign currency reserves by developing countries have reduced
long-term U.S. interest rates by 0.3-1.0% (WEO, April 2004; IMF), and are contributing to the
stability of financial markets.
Up to the present, the management of foreign currency reserves has generally been focused on
low-risk (and low-return) investments such as U.S. Treasury bonds. However, there are more recent
examples of diversification of investments into stocks, real estate and the like via state funds
(sovereign wealth funds [SWF]). The combined scale of SWF currently reaches $2,500 billion
worldwide. The Abu Dhabi Investment Authority of the United Arab Emirates (UAE) is operating a
fund of $875 billion, while Singapore’s Government of Singapore Investment Corporation (GIC) and
Temasek Holdings are operating a fund of $430 billion (Table I-3). China, which holds the world’s
highest level of foreign currency reserves, has established an SWF managing $200 billion, and has
announced the intention to invest $3 billion in the Blackstone Group, a major U.S. investment fund,
as its opening investment.
As this indicates, public sector investments are no longer exclusively focused on U.S. Treasury
bonds; funds from SWFs and oil profits moving through London are being circulated into stock
investments and hedge funds. The flow of international capital transactions is heating up and
becoming more complex.
In addition, in certain regions “south-south financing” is an increasing presence, as illustrated by
an increase in loans by Chinese banks to the resources sector in sub-Saharan Africa. The
Export-Import Bank of China has provided loans of $2.3 billion to Mozambique, $2.0 billion to

17
Angola, and $1.6 billion to Nigeria (2005, 2006, Center for Global Development).
Capital inflows to developing countries are also continuing historical increases. Net capital
inflows to developing countries (capital inflows minus outflows to the rest of the world) reached
$570 billion in 2006, or 5.1% of GDP (World Bank; Fig. I-9). The flow of capital to the developing
countries has increased significantly since 2003. This is the result chiefly of an increase in capital
flows to the private sector via bank loans and direct investment.
A global economic environment of low interest rates and abundant liquidity has encouraged
investors in the developed countries to seek investments offering a higher rate of return. At the same
time, improved fundamentals in the developing countries as a result of high economic growth and
increased foreign currency reserves has reduced the risk (risk premiums) associated with investment
in these countries. As institutional investors, including hedge funds and some private investors, adopt
global perspectives in order to diversify investments, the investment exposure of the developing
countries has increased. In future, attention must be focused on the effects of fiscal tightening in the
U.S. and Europe, the normalization of risk premiums via reevaluation of risk, and the risk of a
sudden retreat of capital from those developing countries in which an excessive amount of debt has
been denominated in foreign currencies by domestic stock markets and banks.
￭ Increased scale of hedge funds and associated risks
Amid the increased activity in the area of cross-border capital transactions, concern has also
mounted over hedge funds actively conducting investments across national borders. Hedge funds
attempt as much as possible to avoid the supervision and regulation of the authorities by conducting
their activities in offshore markets, and freely manage funds accumulated from a limited range of
investors (the super-rich, institutional investors, etc.) using a variety of methods in order to increase
returns regardless of market trends. Their standard procedure is to conduct investments in bonds,
stocks, commodities and other products, applying leverage via derivatives. As of January 2007, there
were 9,550 hedge funds worldwide, with accumulated funds totaling $1.5 trillion (Fig. I-10). This
represents a substantial increase against 2000, with accumulated funds increasing 4.7-fold, and the
number of hedge funds 2.4-fold.
Up to the present, the super-rich represented the investor base for hedge funds. However, the ratio
of investments by the super-rich to total investments in hedge funds declined from 62% in 1997 to
44% in 2005. At the same time, the ratio of investments by institutional investors has climbed from
22% to 28%, and the ratio of investments by the Fund of Hedge Funds (FOHF, a fund that conducts
investments in multiple hedge funds) has increased from 16% to 28%. Taking into consideration the
fact that the majority of institutional investors conduct investments in hedge funds via the FOHF, it
is clear that the investor base for hedge funds has shifted from the super-rich to institutional
investors.

18
The background to increased investment by institutional investors in hedge funds is a quest for
diversification of investments due to a reduction in returns from traditional investments, and an
increase in the level of acceptable investment risk in the present stable financial environment.
The increased scale of hedge funds and the increased involvement of institutional investors have
generated calls for enhanced supervision and regulation and greater transparency. The regulation of
hedge funds was discussed at the G8 Summit in June 2007, but no agreement on direct regulation
was reached. It has also been pointed out that hedge funds focus on distortions in international price
formation (in bond markets, etc.), and seek to increase profits in the process of correcting these
distortions, and by this means make a certain contribution to the unification of global financial
markets. Balancing this, there are concerns over the danger of hedge funds making the transition
from their present comparatively low-risk operations to more high-risk investment styles as profits
decline with increased scale, and over the increased exposure of institutional investors to hedge
funds.

19
Fig. I-1 GDP, trade and FDI growth
Table I-1 GDP growth rate and contribution rate by country and region
(%)
Growth rate Contribution Growth rate Contribution Growth rate Contribution Growth rate Contribution
U.S.A. 2.5 13.2 3.6 14.1 3.1 13.0 2.9 10.8
EU25 1.3 7.4 2.4 10.1 1.8 7.9 3.0 11.7
Japan 1.4 2.5 2.7 3.5 1.9 2.6 2.2 2.6
East Asia 8.0 39.5 8.6 33.5 8.6 37.1 9.2 37.3
China 10.0 30.7 10.1 24.8 10.4 28.8 11.1 29.4
ROK 3.1 1.4 4.7 1.6 4.2 1.5 5.0 1.6
ASEAN10 5.9 6.2 6.5 5.3 6.0 5.3 5.9 4.9
India 7.3 10.1 7.8 8.4 9.2 10.9 9.2 10.3
Latin America 2.4 4.6 6.0 8.5 4.6 7.1 5.5 7.7
Brazil 1.1 0.8 5.7 2.9 2.9 1.6 3.7 1.8
Russia 7.3 4.4 7.2 3.4 6.4 3.3 6.7 3.2
World 4.0 100.0 5.3 100.0 4.9 100.0 5.4 100.0
For reference
Developing countries 6.7 73.0 7.7 65.0 7.5 70.0 7.9 68.6
BRICｓ 8.0 45.9 8.8 39.4 8.9 44.7 9.4 44.7
Sources: WEO (IMF), national statistics.
Notes: 1. The world growth rate was calculated by the IMF using purchasing power parity weighting.
2. Each country or region's contribution rate was calculated using 2006 prices and purchasing power parity weighting.
3. Figures may differ from those found elsewhere due to revisions, differing source data, and other factors.
4. East Asia includes the ASEAN10, China, the ROK, Hong Kong, and Taiwan.
5. Developing countries are as defined by WEO (IMF).
20062003 2004 2005
0
1
2
3
4
5
6
99 00 01 02 03 04 05 06
-60
-40
-20
0
20
40
60
80
GDP
Trade (RHS)
Inward FDI (RHS)
（％）
Notes: % changes fromthe previous year, GDP based on purchasing power parity and trade is
nominal figures.
Source: WEO(IMF), and local statistics
（％）

20
Fig. I-2 World inflation trends
Fig. I-3 Crude oil and gasoline prices
150
170
190
210
230
250
270
290
310
330
2005 2006 2007
40
45
50
55
60
65
70
75
80
Gasoline
Crude oil (RHS)
(dollar per barrel)(cent per gallon)
Note: WTI spot price for crude oil and Retail regular price for gasoline,
monthly prices. Source: US EIA
0
1
2
3
4
5
6
7
8
2000 2001 2002 2003 2004 2005 2006
World
Advanced countries
Developing countries
(%)
Note: broken lines are annual averages between 2000 to 2006. Definitions of
developing and advanced countries are based on IMF's WEO.
Source: WEO(IMF)

21
Table I-2 EU Real GDP Growth by expenditure and by country
Fig. I-4 Contributoin to developing cuntries total GDP growth by country/region
0
1
2
3
4
5
6
7
8
9
2000 2001 2002 2003 2004 2005 2006
China India
Other Asia Western Hemisphere
CIS Middle East
Others Developing countries growth
（points, ％）
Note: real and PPP basis. Definitions of developing and advanced
countries are based on IMF's WEO.
Source: WEO(IMF)
(Unit: %)
2006 2007 (forecast) 2008 (forecast)
EU 25 3.0 2.8 2.6
Personal consumption expenditure 2.0 2.4 2.5
Government consumption expenditure 2.1 1.8 1.8
Gross fixed capital formation 5.5 5.0 4.0
Exports of goods and services 9.2 7.0 6.2
Imports of goods and services 9.0 7.0 6.4
EMU 2.7 2.6 2.5
Germany 2.8 2.5 2.4
Spain 3.9 3.7 3.4
France 2.0 2.4 2.3
Italy 1.9 1.9 1.7
UK 2.8 2.8 2.5
Czech Republic 6.1 4.9 4.9
Hungary 3.9 2.4 2.6
Poland 6.1 6.1 5.5
Source: Eurostat

22
Fig. I-5 % share of consumption, investment and net exports to total GDP in
China
Fig. I-6 Real GDP growth contribution by sector in India
4.4
5.8
3.8
8.5
7.5
9.0
9.4
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2000 2001 2002 2003 2004 2005 2006
Agriculture, forestry and fishery Industry Services Real GDP growth
(points, %)
(FY)
Note: FY99 price, Industry includes mining, manufacturing ,utility (electricity, gas and water supply) and
construction. Services include commerce, hotel, transportation, telecommunication, financial, real estate,
business services and community and social services.
Source: "Handbook of Statistics on Indian Economy"(RBI), Ministry of Statistics and Programme
Implementation
-10
0
10
20
30
40
50
60
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Household Final Consumption Expenditure
Gross Fixed Capital Formation
Net Export of Goods and Service
Note: nominal figures,
Source: Chinese official statistics abstracts
(％)

23
Fig. I-7 Cross boarder financial transaction
0
1
2
3
4
5
6
7
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Other (bank lending, etc.)
Portfolio
FDI
（％）（trillion dollars）
Note: Sum of each countries' liabilities (inward flows) of financial account (FDI, Portfolio
investment, Other investment including financial derivatives) of balance of payments
accounts of the world.
Source: BOP(IMF)
financial
transaction（% of
GDP, RHS)
Fig. I-8 Current account balances of Middle East and Asia
-100
-50
0
50
100
150
200
250
300
350
95 96 97 98 99 00 01 02 03 04 05 06
Middle East
Asia excluding Japan
(billion dollars)
Source: WEO(IMF)

24
Table I-3 Major Sovereign Wealth Funds (SWFs) of the world
Fig. I-9 Net capital flows to developing countries
-100
0
100
200
300
400
500
600
700
1998 1999 2000 2001 2002 2003 2004 2005 2006
Equity
Private debt
FDI
Official debt
（billion dollars）
Private capital
Notes: All items are net inflows. Estimated for year 2006 by the World Bank.
Source: GDF(World Bank)
Fig. I-10 Assets and numbers of Hedge Funds
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2000 2001 2002 2003 2004 2005 2006 2007
0
2,000
4,000
6,000
8,000
10,000
12,000
Asssets
Numbers of Hedge Funds (RHS)
(billion dollars) (numbers)
Note: as of January Source:Hennessee Group
(Unit: billion dollars)
country SWFs Assets
UAE Abu Dhabi Investment Authority 875
Singapore
Government of Singapore Investment Corporation (GIC) and
Temasek (corporate M&As)
430
Saudi Arabia Several SWFs 300
Norway Government pension fund 300
China Official fund (scheduled to establish in September 2007) 200
Source: Morgan Stanley, etc.

25
2. World Trade
(1) World trade increased by 15.4% in 2006, the fourth consecutive year of
double-digit growth
The volume of world trade (merchandise trade, export basis) maintained a high level in 2006,
recording a year-on-year increase of 15.4% to reach $11.8742 trillion (JETRO estimates; Table I-4).
This is the first time that world trade has recorded double-digit growth for four consecutive years in
26 years, since the second oil crisis (1976-1980).
In 2006, buoyant world economy and rapid rise in primary product prices contributed to the
growth in world trade. On the back of rising prices of primary products such as crude oil and metals,
the export price growth rate (IMF) increased by 5.6% (remained unchanged from the 2005 figure of
5.2%), pushing up the nominal export value. Crude oil prices increased by 20.5%, maintaining a
high rate of increase though it declined from the increase of 41.3% recorded in 2005. The prices of
primary commodities (non-fuel) rose significantly, recording an increase of 28.4% due to the rapid
increases in the price of metals such as copper, zinc and nickel (Table I-5). While good harvest saw
food prices decrease by 0.3% in 2005, they increased by 9.9% in 2006. Prices of industrial products
increased 4.4%, equivalent to the level of increase in 2005.
The world real export growth rate increased by 9.8% in 2006, topping the 2005 figure of 8.8%.
The world real GDP growth rate was strong at 5.4%, and the growth in Industrial Production Index
also increased significantly, rising to 3.7% against a 2005 figure of 1.8%.
￭The expansion in world trade was boosted by the EU, East Asia, and resource-exporting
countries
Almost all countries and regions experienced trade expansion in 2006, but the rate of increase
among the developing countries (20.5%, to $5.2055 trillion) outpaced that of the developed countries
(11.7%, to $6.6687 trillion) (Table I-6). Looking at the figures by country and region, the
contribution to world trade growth (exports) by the EU25 (up by 12.5% to $4.5362 trillion) and East
Asia (up by 19.1% to 2.5812 trillion) is particularly remarkable. The contribution rate by the EU25
was 31.9%, while East Asia contributed 26.1%. Exports from raw material exporting countries also
rose conspicuously on the back of spiraling primary product prices. In addition to an increase of
25.7% in the Middle East, exports from Australia increased by 16.5%, Brazil by 16.2%, and Russia
by 22.5%.
The export growth from the EU25, which accounted for 38.2% of world trade, rose by 12.5%
year-on-year, overtaking the 2005 figure of 8.1%. This rise springs from a significant increase in
trade within the EU, which recorded a 13.0% increase in 2006 against 7.1% in 2005, as a result of
economic recovery in the area. Inward exports accounted for 67.3% of total EU25 exports in 2006.
Exports outside the EU also grew 11.6%, up from 10.3% in 2005. The rate of outward export

26
increased significantly, rising to 31.4% with expanded exports of general machinery and transport
equipment to Russia and the CIS. A particularly high increase of 14.8% was recorded by Germany,
and it contributed most to the world export growth among developed countries (9.0%). Exports from
three Central and Eastern European countries (Poland, Hungary and Czech Republic) also recorded a
strong increase of 21.8% on the back of increasing machinery exports.
Due to weak dollar, exports from the U.S. (accounting for 8.7% of the world total) increased by
14.4% to $1.0366 trillion, representing an advance on the 10.7% increase recorded in 2005. However,
imports also rose by 10.8%, resulting in an increase of trade deficit to $817.3 billion, against $767.5
billion in 2005. The country’s trade deficit with China represents $232.6 billion.
Exports from Russia recorded an increase of 22.5% to reach $226.5 billion Fueled by rising crude
oil prices, Russia’s crude exports increased 23.0% to $93.6 billion. The value of Russia’s crude oil
exports was the second largest in the world, and represented 41.3% of Russia’s total export value.
Imports also increased by 40.1% to $128.2 billion, the first time in four years that the import growth
has outpaced that of export. Import figures were driven up by increased imports of automobiles (up
64.6% to $12.7 billion) and IT products (up 56.0% to $14.1 billion).
Brazil recorded strong export growth, up by 16.2% to $137.5 billion. This growth was driven by
increases in exports of iron ore (up 22.6% to $8.9 billion), crude oil (up 65.5% to $6.9 billion), and
Base metals and related products (up 16.0% to $15.3 billion).
Although the rise in crude oil prices has slowed growth in exports from the Middle East from the
figure of over 30% recorded in 2004 since 2005, the region still recorded a 25.7% increase in 2006,
surpassing the world export growth rate.
In East Asia, China’s export value increased by 27.2% to $969.1 billion, making 2006 the fifth
consecutive year of growth over 20%. Contributing to this figure were increases in exports of IT
products (up 27.9% to $316.3 billion), which represent 30% of China’s total export value, textile
products (up 28.3% to $138.1 billion), and steel products (up 52.2% to $51.9 billion). China’s
exports represented 8.2% of the total value of world exports in 2006, putting the country in third
place behind Germany (9.4%) and the U.S. (8.7%) as an exporting country.
The ASEAN countries (Thailand, Malaysia, Indonesia, the Philippines, Singapore and Vietnam)
also recorded strong growth in 2006, with export value increasing by 17.4% year-on-year to $751.0
billion. Vietnam displayed the most conspicuous growth among the ASEAN countries, a figure of
22.8%. Vietnam’s export has increased by over 20% per year since 2003, and in 2006 exports were
strong in textiles (up 24.8% to $6.1 billion) and crude oil (up 12.2% to $7.7 billion).
India’s trade volume increased significantly, with exports up 21.7% and imports up 24.9%
year-on-year. Exports of petroleum products were particularly strong, recording an increase of 73.0%,
and rising from 10.2% to 14.5% as a percentage of India’s total exports.
Australian exports increased by 16.5% to $123.4 This growth was mainly due to favorable

27
increase in iron ore (up 28.8% to $10.8 billion), liquefied natural gas (LNG) (up 37.4% to $3.9
billion), coal (up 5.6% to $17.5 billion) and base metals and related products (up 42.6% to $11.8
billion), buoyed by spiraling primary product prices.
￭ Mineral fuels and base metals are engines of world trade growth
Looking at trade trends by product (export base), the majority of products recorded double-digit
increases in 2006 (Table I-7). Particularly high growth was recorded by mineral fuels (up 25.7%)
and base metals and related products (up 26.4%). These two categories contributed 19.3% and
12.7% respectively to the increase in world trade.
Due to the escalating prices, mineral fuel exports have risen in the 25-35% range for four
consecutive years; between 2002 and 2006 the average growth rate was 30.8. During this period, the
mineral fuel share of world trade rose from 8.1% in 2002 to 12.6% in 2006.
In 2006, petroleum exports grew by 30.0% to $852 billion, with growth somewhat slower than the
38.9% posted in. The Middle East accounted for almost 40% (39.1%) of world crude oil exports, but
the increasing presence of Russia and Africa was also noteworthy in 2006. Russia accounted for
11.0% of world crude oil exports in 2006, an increase of 3.7 points since 2000. Africa’s share of
world crude oil exports rose to 19.6% (a 4.0-point increase since 2000) with increased exports from
Nigeria, Libya, Angola and Algeria.
LNG exports also increased significantly, up 32.9%. The past four years have seen an average
increase of 27.5% in LNG exports driven by rising prices and increasing global demand. Indonesia,
the world’s largest exporter of natural gas, accounted for 19.5% of exports, followed by Qatar at
15.5% and Malaysia at 12.4%. In 2006, export growth from Asia’s two main exporting countries fell
below the rate of global growth rate, with Indonesia recording a 16.2% increase to $10 billion, and
Malaysia recording 15.7% to $6.3 billion. On the other hand, Qatar’s exports increased 46.4% to
$7.9 billion (estimated figures) with an expansion of exports to Japan and Korea. Australia, the
world’s sixth largest exporter of LNG, commenced exports to China in 2006, and recorded an
increase of 37.4% to $3.9 billion dollars. Indonesia’s share of world total LNG exports has been
declining year by year, and the figure of 19.5% recorded in 2006 represents a 13.8-point decline
against the 33.3% recorded by Indonesian exports in 2000. Further declines are expected in future
due to problems in liquefaction plants and the drying-up of gas fields.
Among base metals and related products, steel exports recorded an increase of 16.9% to $531.7
billion. China’s steel exports increased by 52.2% to $51.9 billion, and the country increased its share
in the world’s steel market to 9.8% in 2006, from 7.5% in 2005. Significant increases in copper
exports were recorded among Central and South American countries, with Chile’s exports increasing
by 68.1% and Peru’s by 71.8%. In aluminum, there was a considerable expansion in exports from
Russia (up 31.9%) and Canada (up 41.9%).

28
As prices of mineral fuels continue to spiral upwards, exports of ethanol (ethylene/alcohol, a fuel
that has attracted interest as an oil substitute) continued their spectacular rise, increasing by 64.9%
(against 57.0% in 2005) to $3.5 billion. This increase is linked to the fact that rising crude oil prices
and the need to respond to global warming have increased demand for bio-fuels, consequently
driving up prices. Increased exports to the U.S. (up 10.7-fold to $700 million) among others have
seen Brazil, the world’s largest exporter, double its exports to $1.4 billion (up 93.6%). Brazil boasts
an overwhelmingly high presence in ethanol export, increasing its share of total world exports from
35.0% in 2005 to 41.1% in 2006. China has also increased its share of world mineral fuel exports
from 2.9% to 12.3%, recording an approximately 7-fold increase against the previous year to reach
an export figure of $0.4 billion on the back of increased exports to Korea (registering a 5.5-fold
increase) and Singapore (registering an 11.7-fold increase). Among ethanol import figures, imports
to the U.S. rose sharply, increasing 4.7-fold year-on-year to $1.5 billion.
The export value of corn, a raw material in the production of ethanol, had seen negative growth in
2005 (down 3.6% year-on-year), but increased 16.4% in 2006 to $13 billion.
Machinery and equipment exports grew by 12.9% to $4.9266 trillion, accounting for 40% of
exports worldwide. In 2006, exports from China accounted for 9.9% of total machinery and
equipment exports, while Japan accounted for 9.9% of total exports, making China number 3 in the
world, behind Germany (12.5%) and the U.S. (11.3%). (Fig. I-11). Electrical equipment exports
represented 46.7% of China’s figure of $487.1 billion in machinery and equipment exports, followed
by general machinery (38.3%), transport machinery (7.9%) and precision machinery (7.1%).
However, exports by foreign-affiliated companies accounted for 58.2% of China’s total export
volume in 2006, and the greater percentage of machinery and equipment exports were also assumed
to be made by these companies.
With demand for automobiles growing in both the U.S. and Europe, automobile exports grew by
10.2% to $644.2 billion. As major automakers shifting production overseas, passenger vehicle
exports from developing countries including China, Thailand, Mexico and South Africa have
increased significantly (Fig. I-12). In 2006, the developing countries accounted for 18.2% of all
passenger vehicle exports, a 4.8-point increase over the figure of 13.4% recorded in 2003. Mexico
especially displayed tremendous growth in up 28.9% to $17.4 billion. Eastern European countries
also recorded significant increases, with the Czech Republic up 35.3%, Slovakia up 66.5%, and
Hungary up 65.3%. In Asia, Thailand and China recorded large increases in automotive exports, up
35.8% and 80.7% respectively. According to the Japan Automobile Manufacturers Association
(JAMA), in 2006, Japanese manufacturers produced 11.48 million units domestically, and 10.97
million units overseas, an overseas production ratio of 48.9%. The ratio of domestic to overseas
production is expected to be reversed in 2007.
The developing countries accounted for 27.6% of world motorcycle exports in 2006, with China’s

29
figure of 17.5% placing it second only to Japan (34.9%).
World textile exports grew by 8.7% to reach $551.8 billion. China, the world’s largest exporter of
textiles, continued the extraordinary expansion of its exports, recording a 28.3% increase to $138.1
billion despite the U.S. and the EU import restrictions to Chinese textiles since 2005.3
Since the
abolition of the quotas established under the WTO’s Multifibre Arrangement (MFA), most countries
have seen their share of world textile exports decline, while China’s share increased by 6.6 points
(18.4% to 25.0%) from 2004 to 2006.
3. In November 2005, the U.S. and China signed a Memorandum of Understanding on trade in textile and
apparel. According to this Memorandum, 21 categories of products exported from China to the U.S.
would become subject to import restrictions until 2008. In June 2005, an agreement was reached between
China and the EU under which China would voluntarily limit exports of 10 categories of textile products
to the EU until the end of 2007.
￭ Global IT trade grows 13.9% to $1.898 trillion
Exports of IT products (finished IT products such as computers and video equipment and IT parts
such as semiconductors) recorded strong growth in 2006, up by 13.9% to $1.898 trillion. With the
collapse of the IT bubble, trade in IT products stagnated in 2001 (down 11.8%) and 2002 (up 1.5%),
but has demonstrated more than two-figure growth every year since 2003.
The most notable phenomenon of the year was the stunning growth in IT exports from developing
countries, whose share rose from 42.0% in 2000 to 55.9% in2006. China became the world’s largest
exporter of finished IT products in 2003, of IT parts in 2005, and of IT products as a whole in 2004.
As for 2006, China accounted for 16.7% of IT exports worldwide, a more than approximately
four-fold increase since 2000, when the nation recorded a share of 4.1%. In 2006, Japan took a 9.4%
share of world exports of IT parts, putting it at the number 3 position as an exporter, while its share
of exports of finished IT products declined, placing the nation in number 6 position as an exporter
behind China, the U.S., the UK, Germany and the Netherlands (Table I-8).
Almost all categories excepting audio devices either remained at the same level or increased
against the previous year.
Flat panel displays demonstrated the greatest growth among IT products, increasing by 21.2% to
$98.2 billion. China’s exports increased by 38.4% to $24.0 billion, representing a 24.4% share of the
world market (a 3-point increase over the 2005 figure of 21.4%). Korea eclipsed Japan to take 2nd
place as an exporter in this market, increasing its exports by 27.5% to $13.3 billion against Japan’s
increase of 17.3% to $12.3 billion.

30
Dramatic growth was also recorded in video equipment exports, with an increase of 17.5% fueled
by global demand for liquid crystal televisions and plasma televisions. Telecommunications
equipment exports also grew well, up 19.2% to $278.9 billion. In this area, the category that includes
mobile phones (HS852520) recorded an increase of 14.6%. U.S. Strategy Analytics indicates that the
number of mobile handsets shipped globally increased by 24.7% as new contracts have been signed
in emerging economies such as China and India, reaching a new record of 1 billion units in 2006. In
India, enormous population and a low diffusion rate led to a net increase of 67.27 million contracts
in FY2006, bringing the nation’s total number of users to 166.05 million (data from Telecom
Regulatory Authority of India [TRAI]).
Exports of semiconductors and electronic component recorded a 14.2% increase to $422.2 billion,
representing an 8.6-point year-on-year increase, and exports of electronic tubes and integrated
circuits were both up approximately 8 points against the previous year. According to the U.S.
Semiconductor Industry Association (SIA), favorable economic conditions in the main markets and
strong sales of domestic electronic products such as high-definition television (HDTV) sets
contributed to the expansion of the market for semiconductors.
(2) China’s trade structure changing, Imports of intermediate goods slowing
China’s trade surplus has expanded markedly since 2005. The nation’s 2006 balance of trade rose
sharply up $75.6 billion from the previous year to reach $177.5 billion (Table I-9). Until this point,
export and import growth rates had been similar. Since 2005, however exports have grown 7-10
points faster than imports. The expansions of foreign-affiliated parts manufacturers’ production and
China’s growing technological capability have resulted in rapid growth in local production of
intermediate goods. The previous pattern of importing intermediate goods for assembly in China,
followed by export of final goods, is changing.
In 2006, intermediate goods represented 56.0% of China’s imports, and final goods represented
57.2% of its exports. Intermediate goods were mainly imported from Korea, Taiwan, Japan and
ASEAN (imports from these countries and regions accounted for 60% of China’s total imports of
intermediate goods). The majority of final goods were exported to Europe, the U.S. and Japan. As
part of an East Asian production network, intermediate goods are imported from within the region,
assembled and processed in China, and the final goods are exported to developed countries.
Growth in China’s imports of intermediate goods and exports of final goods had previously been
almost in balance. However, the growth in the nation’s imports of intermediate goods peaked at
46.8% in 2002, and dropped to 17.5% in 2006. Meanwhile, the final goods’ growth rate was much
higher, at 25.0% in 2006. Imports of intermediate goods, which accounted for 61.4% of China’s
total imports in 2002, accounted for only 56.0% in 2006. The share of final goods in the nation’s
total exports also declined, but the fall was small compared to that of imports of intermediate goods

31
(Fig. I-13). Despite the slow down of imports of intermediate goods imports, the nation’s exports of
final goods such as home electronics and transportation equipment are continuing to grow strongly,
and have recorded an increase of around 30% since 2003.
This change in China’s trade structure shows the increase in domestic production of intermediate
goods as well as the increasing infiltration of foreign-affiliated parts manufacturers and improvement
in Chinese companies’ technology, resulting in a greater reliance on domestic production rather than
import, for the sourcing of intermediate goods.
Japanese companies are working to expand local procurement in China. In JETRO’s
November-December 2006 survey of Japanese manufacturers in Asia, we found the percentage of
Japanese companies doing business in China that are increasing local procurement was up 4.0 points
to 50.9%. Japanese automotive manufacturers are also seeking to expanding their local procurement
in China in the next three to four years.
￭ The world trade begins to decline in 2007
Trade (export) statistics for the 16 major countries and regions for which quarterly data is
available up to the first quarter of 2007 show that trade growth slowed to 10.5% in the first quarter
of 2007 (Table I-10).
By product, there was a decline in mineral fuels, including crude oil (down 5.9%), in addition to a
conspicuous slowing of growth in the area of machinery and equipment. The IT-related product
exports displayed a declining tendency from the third quarter of 2006, and slowed to record growth
of only 2.5% in the first quarter of 2007.
(3) World service trade increases by 10.6% in 2006
World trade in services (cross-border private sector service exports, excluding government
services) remained the same in 2006 as the previous year, recording an increase of 10.6% to reach
$2.7108 trillion (Table I-11).
By category, trade in transportation increased by 9.2% to $625.9 billion, travel by 7.3% to $737.1
billion, and “other services”s (financial services, insurance, telecommunications, royalties and
license fees, etc.) increased by 13.1% to $1.3477 trillion. “Other services”, a category which has
recorded double-digit growth for five consecutive years, was the only category of services recording
the growth that has exceeded that of the previous year.
According to the World Tourism Organization (WTO), the number of travelers (arrivals basis)
globally increased by 4.5% to 842 million in 2006. Despite rising crude oil prices and safety
concerns, the strong growth in the travel sector recorded in 2005 continued in 2006.
In 2006, trade in services maintained strong growth at levels similar to the previous year in the
majority of countries and regions (Table I-12). Looking at the main 20 service-exporting countries,

32
Japan surpassed France to take fourth place behind the U.S., the UK and Germany.
Service exports from the U.S., the leading nation in service trade, increased by 9.4% to $387.4
billion in 2006. U.S. service imports increased 9.1% to $306.7 billion. Growth in the “other
services”, which accounted for approximately 50% of U.S. service exports, was particularly strong
against a background of increased trade in financial services. An increase of 11.5% was recorded in
this category.
Services trade grew by 8.8% to reach $1.2472 trillion in the EU25. Growth in transport services
declined to 7.4% against a figure of 11.2% in 2005, but growth accelerated in both travel services
(from 4.6% to 6.3%) and “other services” (from 9.5% to 10.6%). The growth in travel services is
considered to be an effect of large-scale sporting events.
In Asia, service trade grew by 15.2% to reach $613.9 billion. China’s exports grew 17.0% to $86.5
billion, giving the nation a 3.2% share of world services exports. Trade in the services sector
increased by 11.9% to $57.3 billion in Singapore. Growth in travel services was particularly marked
in Singapore, with the rate of growth in this area accelerating from 9.8% in 2005 to 19.5% in 2006.
Singapore removed the ban of casinos in 2005, and the government has set a target of doubling the
number of foreign tourists and tripling tourism revenues by 2015.
The rate of growth of services trade in India was the highest recorded by any of the major
countries, with year-on-year growth of 33.8% in exports and 40.5% in imports. Software services
represented almost 40% of India’s service exports, and this category grew strongly, increasing 33.5%
to $28.8 billion.
Table I-4 World trade indices
Unit 2002 2003 2004 2005 2006
World merchandise trade (based on exports) US$ billion 6,447 7,498 9,111 10,381 11,874
Nominal growth rate % 4.9 16.3 21.5 13.9 15.4
Real growth rate % 4.1 6.1 12.6 8.8 9.8
Export price growth rate % 0.8 10.2 9.0 5.2 5.6
World trade in services US$ billion 1,608 1,842 2,211 2,452 2,711
Growth rate % 7.3 14.6 20.0 10.9 10.6
World real GDP growth rate % 3.1 4.0 5.3 4.9 5.4
Growth in industrial production index (22 industrialized economies) % -0.5 1.3 2.9 1.8 3.7
Price (average) US$/barrel 25.0 28.9 37.8 53.4 64.3
Demand Million barrels/day 77.7 79.2 81.9 83.1 83.7
Change in nominal effective exchange rate of U.S. dollar % -1.6 -12.3 -8.2 -1.5 -0.9
Crude
oil
Notes: 1. 2006 trade value and growth rates are JETRO estimates.
2. Real GDP growth rates based on purchasing power parity.
3. A negative change in the nominal effective exchange rate of the U.S. dollar indicates depreciation.
Sources: IMF, IFS , and WEO ; WTO; BP; and national trade statistics.

33
Table I-5 Trends in trade price indices by commodity
(%)
2002 2003 2004 2005 2006
Industrial products 2.3 14.1 9.3 3.4 4.4
Crude Oil 2.5 15.8 30.7 41.3 20.5
Primary commodities 1.7 6.9 18.5 10.3 28.4
Food 3.4 5.1 14.3 -0.3 9.9
Beverage 16.6 4.9 3.0 21.0 6.3
Agricultural raw materials 1.8 3.7 5.5 1.6 10.1
Metals -2.7 12.2 36.1 26.4 56.5
Source: IMF, WEO.
Table I-6 World trade by country and region (2006)
(US$ million, %)
Value Growth rate Share Contribution Value Growth rate Share Contribution
NAFTA 1,675,209 13.1 14.1 12.3 2,459,938 11.3 20.1 16.1
U.S.A. 1,036,635 14.4 8.7 8.2 1,853,938 10.8 15.1 11.6
Canada 388,113 7.6 3.3 1.7 349,795 11.2 2.9 2.3
Mexico 250,461 17.0 2.1 2.3 256,205 15.7 2.1 2.2
EU25 4,536,175 12.5 38.2 31.9 4,624,074 13.7 37.8 35.8
EU15 4,156,494 11.7 35.0 27.4 4,187,369 12.7 34.2 30.4
Germany 1,113,036 14.8 9.4 9.0 909,523 17.3 7.4 8.6
France 489,853 5.8 4.1 1.7 534,845 6.2 4.4 2.0
UK 447,619 13.6 3.8 3.4 566,031 12.7 4.6 4.1
Italy 411,234 10.3 3.5 2.4 437,759 13.8 3.6 3.4
Netherlands 462,848 14.1 3.9 3.6 416,892 14.8 3.4 3.5
Belgium 369,328 10.5 3.1 2.2 353,843 11.1 2.9 2.3
Spain 205,482 6.7 1.7 0.8 316,621 9.8 2.6 1.8
Sweden 147,506 13.3 1.2 1.1 126,771 13.9 1.0 1.0
New EU members 379,681 22.9 3.2 4.5 430,255 23.7 3.5 5.3
3 central and eastern European countries 280,249 21.8 2.4 3.2 296,683 21.5 2.4 3.4
Japan 647,290 8.2 5.5 3.1 579,294 11.7 4.7 3.9
East Asia 2,581,248 19.1 21.7 26.1 2,295,051 16.2 18.8 20.6
China 969,073 27.2 8.2 13.1 791,614 19.9 6.5 8.5
ROK 325,465 14.4 2.7 2.6 309,383 18.4 2.5 3.1
Taiwan 213,004 12.7 1.8 1.5 202,038 11.2 1.7 1.3
Hong Kong 322,664 10.4 2.7 1.9 335,753 11.7 2.7 2.3
ASEAN 751,043 17.4 6.3 7.0 656,264 14.8 5.4 5.4
Thailand 130,621 18.9 1.1 1.3 128,652 8.9 1.1 0.7
Malaysia 160,845 14.1 1.4 1.3 131,223 14.5 1.1 1.1
Indonesia 100,799 17.7 0.8 1.0 61,065 5.8 0.5 0.2
Philippines 47,037 14.7 0.4 0.4 51,533 17.0 0.4 0.5
Singapore 271,916 18.4 2.3 2.7 238,900 19.4 2.0 2.5
Vietnam 39,826 22.8 0.3 0.5 44,891 21.4 0.4 0.5
India 121,259 21.7 1.0 1.4 172,876 24.9 1.4 2.2
Switzerland 147,884 13.1 1.2 1.1 141,468 11.9 1.2 1.0
Australia 123,372 16.5 1.0 1.1 132,753 11.9 1.1 0.9
Brazil 137,470 16.2 1.2 1.2 91,396 24.3 0.7 1.1
Argentina 46,528 15.3 0.4 0.4 34,159 19.1 0.3 0.4
Russia 226,524 22.5 1.9 2.6 128,151 40.1 1.0 2.4
Turkey 85,502 16.4 0.7 0.8 138,295 18.4 1.1 1.4
South Africa 57,897 11.6 0.5 0.4 68,157 23.9 0.6 0.8
World 11,874,183 15.4 100.0 100.0 12,239,837 14.6 100.0 100.0
Industrial countries 6,668,707 11.7 56.2 44.0 7,362,212 12.0 60.1 50.8
Developing countries 5,205,476 20.5 43.8 56.0 4,877,625 18.6 39.9 49.2
BRICs 1,454,326 24.8 12.2 18.3 1,184,036 22.9 9.7 14.2
Exports Imports
Notes: 1. Value of world trade and for the EU25, new EU members, industrial countries, and developing countries based on JETRO estimates.
2. The 3 central and eastern European countries are Poland, Hungary, and the Czech Republic.
3. ASEAN consists of 6 countries: Thailand, Malaysia, Indonesia, the Philippines, Singapore, and Vietnam.
4. Definitions of industrial countries and developing countries are based on the IFS (IMF) .
Sources: National trade statistics.

34
Table I-7 World trade (exports) in 2006
(US$ million, %)
Value Growth rate Share Contribution
Total value 11,874,183 15.4 100.0 100.0
Machinery and equipment 4,926,611 12.9 41.5 35.6
General machinery 1,583,395 12.0 13.3 10.7
Air conditioners 24,841 9.9 0.2 0.1
Electrical equipment 1,633,948 15.4 13.8 13.8
Transport equipment 1,307,632 10.9 11.0 8.1
Automobiles 644,231 10.2 5.4 3.8
Passenger vehicles 541,039 9.6 4.6 3.0
Motorcycles 18,310 11.1 0.2 0.1
Automotive parts 281,531 9.3 2.4 1.5
Precision instruments 401,663 13.2 3.4 3.0
Chemicals 1,502,311 12.5 12.7 10.5
Industrial chemicals 1,005,270 12.1 8.5 6.8
Pharmaceuticals and medical supplies 289,964 15.2 2.4 2.4
Plastics and rubber 497,041 13.3 4.2 3.7
Foodstuffs 686,362 9.6 5.8 3.8
Seafood 62,202 7.7 0.5 0.3
Tuna 2,262 -10.8 0.0 0.0
Grains 46,675 11.8 0.4 0.3
Corn 12,960 16.4 0.1 0.1
Processed food products 309,768 12.2 2.6 2.1
3,495 64.9 0.0 0.1
Oils, fats, and other animal and vegetable products 78,688 10.4 0.7 0.5
Soybeans 16,056 2.9 0.1 0.0
Animal and plant fats 43,125 15.6 0.4 0.4
Miscellaneous manufactured goods 342,855 10.2 2.9 2.0
Iron ore 33,760 18.7 0.3 0.3
Mineral fuels, etc. 1,559,176 25.0 13.1 19.7
Mineral fuels 1,494,286 25.7 12.6 19.3
Coal 50,346 7.5 0.4 0.2
LNG 51,209 32.9 0.4 0.8
Petroleum and petroleum products 1,276,577 28.4 10.8 17.8
Crude oil 852,016 30.0 7.2 12.4
Textiles and textile products 551,806 8.7 4.6 2.8
Synthetic fibers and textiles 66,456 3.0 0.6 0.1
Clothing 306,229 11.9 2.6 2.1
Knit products 147,777 16.3 1.2 1.3
Cloth 158,452 8.1 1.3 0.7
Base metals and base metal products 965,735 26.4 8.1 12.7
Steel 531,721 16.9 4.5 4.8
Primary steel products 326,775 15.0 2.8 2.7
Steel products 204,947 20.0 1.7 2.2
Copper 49,969 81.4 0.4 1.4
Nickel 15,229 55.2 0.1 0.3
Aluminum 51,640 35.9 0.4 0.9
Lead 3,260 30.6 0.0 0.0
IT products
Computers and peripherals 522,716 9.6 4.4 2.9
Computers and peripherals 307,871 9.0 2.6 1.6
Parts for computers and peripherals 214,846 10.4 1.8 1.3
Office equipment 22,169 18.8 0.2 0.2
Telecommunications equipment 278,854 19.2 2.3 2.8
Semiconductors and electronic components 422,160 14.2 3.6 3.3
Electron tubes and semiconductors 73,493 12.8 0.6 0.5
Integrated circuits 348,667 14.5 2.9 2.8
Other electronic components 354,596 15.9 3.0 3.1
Flat panel displays 98,206 21.2 0.8 1.1
Video equipment 135,013 17.5 1.1 1.3
Audio equipment 13,455 -8.7 0.1 -0.1
Measuring and testing equipment 149,751 13.5 1.3 1.1
IT parts 991,602 14.0 8.4 7.7
Finished IT products 906,394 13.9 7.6 7.0
Total IT equipment 1,897,996 13.9 16.0 14.6
Ethanol (Ethyl alcohol)

35
Fig. I-11 Shares of world machinery and equipment exports
Fig. I-12 Developing countries' share of world passenger vehicle exports
18.2
16.3
14.8
13.4
12.8
13.813.7
11.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
1999 2000 2001 2002 2003 2004 2005 2006
（％）
ROK Eastern Europe Mexico
Brazil Turkey Thailand
South Africa China Others
Notes: 1. Definition of developing countries based on the IFS(IMF).
2. Eastern Europe are the Czech Republic, Poland, Slovakia, Hungary, and Slovenia.
Source: National trade statistics.
12.3
10.6 10.4 10.3 9.6 9.110.7
9.9
8.7
7.2
6.1
4.7
3.7
3.1
15.8 15.2
13.7 12.1
11.2 11.2 11.3
10.7
11.8 12.4
12.9
12.9 12.5
12.5
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2000 2001 2002 2003 2004 2005 2006
(%)
Japan China U.S.A. Germany

36
Table I-8 Top ten countries/regions in IT-related exports
Table I-9 China's trade balance
Fig. I-13 China's exports of final goods and imports of intermediate
(US$ million, %)
2000 2001 2002 2003 2004 2005 2006
Trade balance 24,115 22,541 30,362 25,534 31,946 101,881 177,459
Change -5,098 -1,574 7,821 -4,828 6,411 69,935 75,579
Exports 249,212 266,155 325,565 438,371 593,369 761,999 969,073
Growth rate 27.8 6.8 22.3 34.6 35.4 28.4 27.2
Imports 225,097 243,613 295,203 412,836 561,423 660,119 791,614
Growth rate 35.8 8.2 21.2 39.8 36.0 17.6 19.9
Source: China's trade statistics.
3,220
4,435
3,775
2,469
1,812 3,468
5,547
4,437
2,614
1,921
56.0
58.2
57.2
57.2
57.4
59.8
61.4
58.5
59.0
59.6
0
1,000
2,000
3,000
4,000
5,000
6,000
2002 2003 2004 2005 2006
(U S$ m illion)
53
54
55
56
57
58
59
60
61
62
(% )
Im ports of interm ediate goods E xports of final goods
Interm ediate goods' share of total im ports Final goods' share of total exports
N ote: B ased on the U N B E C classification. Interm ediate goods do not include processed fuels.
Source: C hina's trade statistics.
(%)
Countries/regions Share Countries/regions Share Countries/regions Share
1 China 16.7 China 12.6 China 21.1
2 U.S.A. 9.7 U.S.A. 10.2 U.S.A. 9.2
3 Japan 7.3 Japan 9.4 UK 8.0
4 Germany 6.2 Taiwan 6.6 Germany 7.1
5 UK 5.1 ROK 5.9 Netherlands 5.4
6 ROK 5.0 Germany 5.3 Japan 4.9
7 Netherlands 4.4 Malaysia 4.5 Mexico 4.6
8 Taiwan 4.2 Singapore 4.0 ROK 4.1
9 Malaysia 3.9 Netherlands 3.5 Malaysia 3.2
10 Mexico 3.0 UK 2.4 France 2.7
IT parts IT finished products
IT Products (total)
Rank

37
Table I-10 Quarterly trade by major countries and regions in exports of major
products
Table. I-11 Trade in services(exports)
(%, US$million)
Value Contribution
Value of global service exports 6.2 0.3 7.3 14.6 20.0 10.9 10.6 2,710,800 100.0
Transportation 7.1 -0.9 4.6 13.4 24.9 12.2 9.2 625,900 20.4
Travel 3.9 -2.2 4.6 10.0 18.2 7.8 7.3 737,100 19.5
Other services 7.4 2.8 10.6 18.1 18.9 12.2 13.1 1,347,700 60.1
Source: WTO.
2004 2005 20062000 2001 2002 2003
(US$million, growth rate: %)
2007
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
Total value 59.4 1,664,404 1,786,621 1,809,540 1,927,602 1,839,761
(14.3) (14.5) (14.0) (14.0) (10.5)
Machinery and equipment 76.3 879,910 939,991 930,288 1,008,102 965,182
(15.4) (14.3) (12.8) (12.8) (9.7)
General machinery 73.1 266,757 284,170 292,128 314,388 305,080
(8.3) (9.8) (13.6) (15.5) (14.4)
Electrical equipmetn 80.1 304,428 330,055 327,866 346,290 318,758
(24.0) (22.9) (13.3) (9.8) (4.7)
Transport equipment 74.7 234,953 248,169 230,676 261,884 263,620
(12.9) (9.7) (11.0) (13.8) (12.2)
Precision instruments 78.8 73,771 77,596 79,618 85,541 77,724
(17.2) (13.1) (12.6) (12.1) (5.4)
Chemicals 61.8 216,607 231,645 237,610 243,604 255,249
(7.8) (10.8) (16.9) (17.9) (17.8)
Foodstuffs 45.8 70,846 74,993 80,149 88,609 83,748
(7.9) (6.8) (13.2) (16.2) (18.2)
Textiles and textile products 58.1 69,539 79,375 89,456 82,333 74,768
(8.3) (11.3) (12.6) (15.5) (7.5)
Steel 55.4 62,895 70,999 76,814 83,704 86,711
(0.9) (8.3) (30.4) (39.4) (37.9)
Iron ore (Imports) 82.5 8,874 8,835 10,293 9,961 11,438
(31.3) (6.5) (24.0) (15.0) (28.9)
Mineral fuels (Imports) 69.6 262,555 282,123 300,385 252,227 248,183
(38.0) (33.4) (24.0) (-1.7) (-5.5)
Crude oil (Imports) 70.9 154,374 172,116 189,298 152,776 145,336
(40.8) (34.0) (28.4) (1.9) (-5.9）
IT parts 84.8 192,186 203,388 219,265 225,639 199,392
(17.0) (16.4) (15.9) (11.8) (3.7)
IT finished products 78.4 168,197 182,293 169,350 190,865 169,933
(25.7) (26.1) (8.6) (7.7) (1.0)
Total IT equipment 81.7 360,383 385,681 388,615 416,504 369,325
(20.9) (20.7) (12.6) (9.9) (2.5)
2006
Major 16
countries/regions
' share of world
total in 2006
Notes: 1.16 major countries and regions are U.S.A, Canada, Mexico, Germany, France, UK, Japan, China, ROK, Taiwan,
Hong Kong, Singapore, Thailand, Malaysia, Switzerland, and Brazil.
2. Iron ore, mineral fuels, and crude oil are import figures. Others are export figures.
3. Growth rates are Y o Y comparisons.

38
Table I-12 Trade in services by coutry and region(2006)
Value
Growth
rate
Share Value
Growth
rate
Share
World 2,710,800 10.6 100.0 2,619,600 10.3 100.0
NAFTA 459,633 8.8 17.0 400,863 9.4 15.3
U.S.A. 387,383 9.4 14.3 306,728 9.1 11.7
Canada 55,959 7.2 2.1 71,622 11.6 2.7
Mexico 16,292 1.2 0.6 22,513 7.6 0.9
Central and South America 77,000 14.2 2.8 80,100 13.5 3.1
Brazil 17,971 20.6 0.7 26,740 19.9 1.0
Europe 1,382,300 8.6 51.0 1,222,700 7.8 46.7
EU25 1,247,200 8.8 46.0 1,132,300 7.9 43.2
Germany 164,235 10.6 6.1 214,499 6.7 8.2
UK 223,103 9.3 8.2 169,367 6.5 6.5
France 112,353 -2.3 4.1 108,015 3.0 4.1
Italy 100,476 13.1 3.7 100,916 13.5 3.9
Spain 100,263 8.1 3.7 76,578 17.5 2.9
Netherlands 81,690 4.5 3.0 77,812 7.5 3.0
CIS 50,900 21.2 1.9 74,400 19.0 2.8
Russia 29,820 22.0 1.1 44,891 16.7 1.7
Africa 64,400 11.8 2.4 79,800 11.9 3.0
South Africa 11,793 8.2 0.4 13,936 17.5 0.5
Middle East 62,600 9.4 2.3 96,100 9.5 3.7
Asia 613,900 15.2 22.6 665,500 14.3 25.4
Japan 121,395 12.5 4.5 142,775 7.7 5.5
China 86,500 17.0 3.2 99,700 19.9 3.8
ROK 50,744 15.5 1.9 69,423 20.2 2.7
Hong Kong 71,323 14.7 2.6 34,731 7.2 1.3
India 72,800 33.8 2.7 69,532 40.5 2.7
ASEAN10 123,200 12.4 4.5 157,400 12.7 6.0
Singapore 57,300 11.9 2.1 60,767 12.4 2.3
Note: Value of China based on WTO estimates.
Source: WTO.
(US$million, %)
Exports Imports

39
3. Global Direct Investment and Cross-border M&As
(1) Global inward direct investment exceeds 1 trillion dollars for the second
consecutive year in 2006
In 2006 global inward direct investment grew by 25.8% year-on-year to reach $1.4215 trillion
(JETRO estimate; international balance of payments base; net; flow), the second consecutive year of
figures in excess of $ 1 trillion (2005: $1.1297 trillion (Table I-13; Reference Section/Statistics: See
Table 6). Following the historical peak of $1.5876 trillion recorded for world inward direct
investment in 2000 during the M&A boom, figures declined significantly through 2003. Three
consecutive years of increases commenced in 2004, and figures reached 89.5% of their 2000 level in
2006. World outward direct investment increased 43.3% to $1.4358 trillion in 2006.4
Figures for global direct investment in 2006 rivaled the historical peak due to increased activity in
cross-border M&As (up 14.8% year-on-year to $974.5 billion) against a background of low interest
rates, increased company desire for acquisitions prompted by profit increase under high growth
worldwide, and an increase in the number of leveraged buy-outs (LBOs) (discussed below) by
investment companies and others, in addition to strong investment in developing countries (Fig.
I-14).
4. Theoretically, figures for global inward direct investment and outward direct investment should match,
but in many cases figures and trends differ in actual statistics. The reason for this is the fact that the
definition and method of evaluation of direct investment (treatment of lower limit figures in accounts,
reinvested profits, sub-subsidiaries, transfer of profits, transactions with offshore companies, etc.) and the
period for which direct investment is recorded in the accounts differ from country to country.
￭ Significant increases in inward and outward direct investment in the U.S.
Considered by country and region, growth in both inward and outward direct investment was
particularly high in the U.S. The EU25 accounted for approximately half of world direct investment,
but growth was low in both inward and outward investment.
Inward direct investment in the U.S. recorded a spectacular increase, up 65.7% year-on-year to
$180.6 billion, the highest investment flow since the 2000 M&A boom. The rate of contribution of
the U.S. to the global increase in inward direct investment in 2006 was 24.5%.
Looking at the figures for U.S. inward direct investment by category, ”net equity capital” recorded
an increase of 73.2% to $98.0 billion, contributing 57.9% to the growth in inward direct investment
in the country. This increase stems from an increase in M&As targeting U.S. companies, chiefly by
European companies, for example the purchase of Lucent Technologies for $14.7 billion by France’s

40
Alcatel. “Reinvestment earnings” also increased by 48.0% to $70.6 billion, contributing 32.0% to the
growth in inward direct investment in the U.S. This was due to a 14.8% increase in the profits of U.S.
subsidiaries of foreign companies in favorable economic conditions, and an increase in the ratio of
retention of those profits (reinvestment of profits in the U.S. subsidiary rather than transfer to the
foreign parent company) from 46.7% in 2005 to 60.2% in 2006.
In a reversal of the reduction that occurred in 2005, U.S. outward direct investments recorded
rapid growth to $235.4 billion in 2006. The rate of contribution of the U.S. to the overall growth in
world outward direct investment in 2006 was 56.0%.
In 2005, the effect of the American Jobs Creation Act5
caused increased repatriation of profits
from U.S. subsidiaries overseas to parent companies in the U.S., resulting in a reduction of $20.4
billion in reinvested earnings, and a consequent overall reduction in the level of outward direct
investment. With the disappearance of this special factor in 2006, reinvested earnings climbed
rapidly to $220.1 billion. Reinvested earnings accounted for almost the entirety of the increase in
U.S. inward investment in 2006, with a contribution ratio of 99.0%.
5. The aim of the American Jobs Creation Act was to encourage U.S. companies to increase investment
and create more jobs in the U.S. To this end, companies were offered tax breaks under specific conditions
if they repatriated profits from overseas subsidiaries to the U.S. as dividends.
Inward direct investment in the EU25 recorded only a minor increase, growing 2.1% year-on-year
to $668.7 billion (rate of contribution: 4.8%). However, the $80.3 billion structural reorganization of
the oil giant Royal Dutch Shell Group (RDS) in 2005 contributed significantly to this result. If this
factor is excluded, inward direct investment in the EU25 grew 16.4% in 2006.
Inward direct investment in the EU25 from the region itself, which accounted for 72.2% of its
inward direct investment, decreased 9.2% against the previous year, due to the effect of the RDS
reorganization and other factors. Investment from outside the region, however, grew rapidly at a rate
of 55.1%. Investment from the U.S. increased approximately 2.5-fold. The resurgence in the level of
reinvested profits discussed above was one factor in this increase. While the UK accepted the highest
level of investment among the EU25 in 2005, investment in the nation was down 28.8%
year-on-year to $139.5 billion in 2006, due among other factors to the RDS reorganization. By
contrast, investment rose steeply in Belgium and Italy, up 110.4% and 96.3%, respectively.
Like inward direct investment to the region, outward direct investment from the EU25 grew only
slightly in 2006, recording a 2.0% increase year-on-year to $794.9 billion. If the integration of RDS
mentioned above is excluded, the increase becomes 13.7%. Investment within the region accounted

41
for 67.3% of outward direct investment from the EU, and was down 1.7% year-on-year due to the
effect of the RDS reorganization and other factors. Investment outside the region increased by 9.6%.
Among the EU25, the level of investments by the Netherlands, the major investing nation in 2006,
were down 11.0% year-on-year to $169.9 billion due among other factors to the RDS reorganization.
Investment by Spain increased 2.1-fold to $89.7 billion on the back of large-scale M&As in the area
of electronic communications. Spain’s rate of contribution to the increase in world outward direct
investment was 11.0%, the highest contribution made by an EU25 country. Spain has been requested
by the European Commission to abolish its foreign investment support scheme6
and has been
reducing support measures from 2007 and plans to phase them out by 2010.
Inward direct investment to the ten new EU member countries increased 2.1% year-on-year to
$38.8 billion. The greatest amount of investment was directed towards Poland. Investment in the
nation increased by 45.0% to $13.9 billion, and accounted for approximately one-third of total
investment in the new EU member countries.
6. This system enabled Spanish companies that have opened a foreign branch or purchased shares in a
foreign company for the purpose of exporting goods or services to withhold an amount of tax
corresponding to 25% of the amount invested.
￭ Investment in China records negative growth after two consecutive years of positive growth
Inward direct investment to East Asia increased 15.9% year-on-year to $174.4 billion,
representing 12.3% of the world total. China received the highest amount of investment in the region,
but investment in the nation was down by 1.3% to $78.1 billion, the first time negative growth has
been recorded since 2003, when investment fell 4.5% (down 4.5%) (Table I-14). On an investment
execution basis (gross basis, excluding banks, securities, and insurance), investment in China
increased by 4.5% to $63.0 billion, but direct investment from major countries and regions declined,
including Japan (down 29.6% to $4.6 billion) and the U.S. (down 6.4% to $2.9 billion). Considered
by industry sector, investment decreased in manufacturing industries and increased in
non-manufacturing industries.
The peaking of investment in manufacturing industries and change in the investment environment
can be observed behind the slowing of investment in China. Labor cost increased an average of
12.3% per year in China between 2000 and 2005 (China Statistical Yearbook). In addition, as part of
a trend towards change in government policy regarding foreign funds, the tax refund rate for direct
taxes on increased imports has been reduced, and a tax on company earnings was adopted by the
National People’s Congress in March 2007. As of January 2008, preferential company tax measures

42
relating to foreign funds will be scrapped, and a uniform tax rate (in principle, 25%), will come into
effect for all domestic and foreign companies. In addition, improvement in the foreign funding
environment is one focus of the nation’s 11th Five-year Plan (2006 to 2010), and China is attempting
to attract foreign capital to higher value-added products and service industries.
Both Hong Kong and Singapore also pushed up figures for inward direct investment in East Asia,
with the former recording a 27.6% year-on-year increase to $42.9 billion to take second position in
the region after China, and the latter recording a 61.3% increase to $24.2 billion to take third
position.
The rate of increase of investment in Thailand slowed in 2006, with the nation recording an
increase of 8.9% year-on-year to finish at $9.8 billion, against an increase of 52.8% in 2005. On an
approval basis this represents a decline of 18.2% to $7.0 billion. To some extent this reduction in
investment is an effect of the large-scale automotive-related investment conducted in 2005 by
Japanese companies, but can also be seen to have been affected by political instability and unclear
economic policy directions (strengthening of restrictions on short-term capital flows, foreign funding,
etc.) since the military coup and the establishment of military rule in September 2006.
India recorded a 2.5-fold year-on-year growth in investment to $16.9 billion. Inward M&As also
increased, up 44.8% to $0.79 billion. India’s high economic growth is continuing, with an average
annual growth of 8.6% in real GDP between 2003 and 2006, and the nation is experiencing an influx
of direct investment that seeks to open up new markets.
Investment in Vietnam increased 2.1-fold year-on-year to $8.8 billion on a new approval basis,
representing a historical high for the country. Given its abundant and low-cost labor force, political
stability and the prospect of relaxation of restrictions on foreign funding with its accession to the
WTO in January 2007, Vietnam has become the focus of attention as both an emerging market and a
potential production base alongside China, enabling risk to be spread.
The UN’s Economic Commission for Latin America and the Caribbean (ECLAC) reports that
inward direct investment to Central and South America increased by 1.5% against 2005 to $72.4
billion. Mexico received the highest amount of investment, recording an increase of 20.8% to $19.0
billion, while investment in Brazil increased 24.7% to $18.8 billion. According to ECLAC, the
sources of inward direct investment in Latin America and the Caribbean have displayed a trend
towards diversification recently, with investment from Spain, the major investor in the region, on the
decline. Investment in resources-related industries represented the major type of investment in the
region.
Inward direct investment in Israel increased 3.0-fold year-on-year to $14.2 billion, continuing
2005’s high growth (up 2.3-fold to $4.8 billion). Inward M&As also recorded a significant increase
in Israel growing 3.4-fold to $8.2 billion. The majority of investment was conducted in the
machinery and equipment, and software fields.

2007 jetro whitepaper on international trade and foreign direct investment

2007 jetro whitepaper on international trade and foreign direct investment

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